Sen. Richard Durbin (D-IL) last Thursday reintroduced two bills related to private education loans: one designed to allow schools full certification of private student loans and the other to permit such loans to be discharged in bankruptcy proceedings like other types of private debt.

The Know Before You Owe Act (S. 113) would amend both the Higher Education Act (HEOA) and the Truth in Lending Act (TILA) to strengthen requirements surrounding private education loans and to correct some technical flaws in the definition of private loans. The Fairness for Struggling Students Act (S. 114) would allow private student loans to be discharged in bankruptcy, an allowance that NASFAA has historically supported.

Know Before You Owe Act

Durbin first introduced the Know Before You Owe Act in March of 2012 with fellow Democrat Sen. Tom Harkin (IA). The version of the bill introduced in the 112th Congress contains identical language to the version introduced to the new 113th Congress.

Concerned that many students who take on private loan debt do not have full information about more advantageous federal aid, the bill’s sponsors would require full certification by schools of private education loans, a step long advocated by NASFAA and other higher education groups.

"We remain concerned that many students who take on private loan debt do not have all the information they need," said NASFAA President Justin Draeger. "Full school certification would allow financial aid administrators an opportunity to talk to students about more advantageous federal aid options, before they commit to a private loan."

Instead of the current student self-certification, the Know Before You Owe Act would require lenders to obtain the student’s enrollment status, cost of attendance, and unmet financial need directly from the institution.

The school would have 15 business days to provide either the certification or notification that it has received the certification request but needs additional time to comply. Failing either of those actions within the allotted timeline, the lender could issue funds to the student without the school certification but would have to report the loan to the Consumer Financial Protection Bureau (CFPB) and notify the school of the amount. The CFPB would be given authority to regulate this notification. It is NASFAA's understanding that this provision not intended to be punitive to the institution.

Before certifying a loan, and within the 15 business-day window, a school would have to determine whether the student has applied for and exhausted federal Title IV student aid, and inform the student accordingly—among other disclosures.

Lenders would also have to provide quarterly loan statements to enrolled borrowers showing remaining debt owed the lender, any debt increases, and the current interest rate for each loan.

The measure would also amend TILA to exclude federal loans under Titles VII and VIII of the Public Health Service Act from the definition of a “private education loan.”

The bill would direct the CFPB to issue regulations within one year of enactment, to become effective within six months of issuance. Within two years of the issuance of regulations, the CFPB and ED would have to report jointly to Congress on (1) compliance by both institutions and lenders, and (2) the degree to which specific institutions utilize certifications in effectively encouraging the exhaustion of Federal student loan eligibility and lowering student private education loan debt.

Fairness for Struggling Students Act

Durbin in the 112th Congress first introduced the Fairness for Struggling Students Act. The Act would revise federal bankruptcy law to allow the discharge of private education loans if the loans demonstrate undue hardship to the borrower, similar to other forms of private debt.

The bill would repeal the current exemption for any loan made under any program funded in whole or in part by a governmental unit or nonprofit institution, and any other qualified education loan incurred by an individual debtor on behalf of the taxpayer, the taxpayer’s spouse, or any dependent, including indebtedness used to refinance a qualified education loan, according to the bill summary.

“In 2005, the law was unjustifiably changed to give private student loans the same privileged bankruptcy treatment as government loans, even though private student loans have vastly different terms and fewer consumer protections,” Durbin said in a release. “Today’s bill would restore the bankruptcy law, as it pertains to private student loans, to the language that was in place before 2005 so that privately issued student loans will once again be dischargeable in bankruptcy like nearly all other forms of private debt.”

As currently stipulated by bankruptcy law, borrowers who demonstrate an “undue hardship” may have their loans discharged in bankruptcy. In testimony provided to the Senate Subcommittee on Administrative Oversight and the Courts in March 2012, NASFAA President Justin Draeger said that NASFAA “does not find the ‘undue hardship’ clause to be sufficient protection for private education loan borrowers.”

“Allowing the discharge of private student loan debt in bankruptcy is critical to ensuring fairness for American consumers and to provide a way for some struggling private student loan borrowers to establish financial stability,” Draeger added.

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